According to Raghuram Rajan, the current pace of growth is a cause of worry. “Look at the current growth relative to 2019. Over the last three years, if you look at the last quarter’s growth and compare it to the same quarter in 2019, we have grown at 2.5% a year. We cannot create the jobs we need if we grow at that miserable pace,” he said. While acknowledging that the government is doing a good job on infrastructure, Rajan states that there is a need to create the environment for growth.
“All these industrialists who are clapping and saying that the government is doing a great job, why are they not investing? The answer is that they are not very optimistic at this point about the growth scenario and that is why they are not investing as much as they should to elevate the growth pace of the economy,” Rajan opines.
Union Budget 2023 top priorities
- Rajan says the government has to reassure industrialists in many ways including tariffs, taxes, and also on the reform agenda. “If it can come out with a vision for reforms which is sensible, sustainable and energise them in the growth process, that I think will be the greatest contribution from this Budget.”
- Rajan dreads another round of tariff increases. This will make it even more high cost and harder for us to become that China+1, he says.
- According to Rajan, the government should be more cautious on what it spends on. “We do need targeted spending on the very poor. But we need to understand that even the layer above that, the lower middle class, is suffering because of the lack of jobs. The answer is to find new ways of growth.”
Production Linked Incentive Scheme: A Success Story?
The Narendra Modi government introduced the Production Linked Incentive (PLI) scheme in 14 sectors to incentivise manufacturing and create job opportunities while positioning India as an alternate destination. One of the success stories of the PLI scheme has been seen as the production and export of mobile phones in India. However Rajan has raised doubts on the efficacy of the scheme.
Lower middle-class suffering, govt needs to focus on growth: Raghuram Rajan on Budget 2023
“We are certainly producing many more mobile phones, but look at the import of the mobile phone components into the country. Are we producing all those components or are we importing more? When I took a look at that particular sector, what I found was, we are producing more in the country, but our imports have also increased considerably in that area,” he said.
Rajan believes this is because the PLI scheme rewards production. “Mobile phones do not have a value added requirement. It’s not necessarily required to produce more value added in the country. If you assemble and put it out you get the benefits of PLI,” he noted.
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Over time the hope is that they (companies) will produce more components in this country, he said. Rajan cautions that one should not look at only the production data for mobile phones.
He has two main worries with regards to the PLI scheme; will companies continue to manufacture in India even after the incentives stop, and the choice of sectors being subsidised.
Rajan advocates the need for a cost benefit analysis on how many jobs the subsidies are creating. “I am particularly perturbed by this claim that we are going to build chips with enormous subsidies. How many jobs are going to be created by that? Will we be able to make state-of-the-art chips?” he questions. He compares the investments in the US and Taiwan and says they are way beyond what India is contemplating. “I don’t think the players that are currently being touted – Vedanata – have any competence in making chips. I simply don’t understand how these players are being picked, who is picking them, who is picking the sectors,” he told ET Now.
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Finance Minister Nirmala Sitharaman will present the last full budget of the government on February 1, 2023.